Senior Citizens & Bankruptcy

When inflation and health care costs are on the rise, it's not uncommon for elderly Americans to seek bankruptcy relief. And while senior citizens enjoy certain advantages over other debtors, bankruptcy won't be the right choice for those who stand to lose a lot of property. Read on to find out about other common issues affecting senior citizens in bankruptcy.

You can learn about the benefits of bankruptcy by reading Should I File for Chapter 7 or Chapter 13 Bankruptcy?

Is a Bankruptcy Filing Necessary?

Filing for bankruptcy can be an easy way to wipe out debt and maximize the amount of money available to pay monthly bills. However, many seniors don't feel comfortable filing for bankruptcy, and it isn't always necessary or even a good idea.

Here are two situations that make filing bankruptcy of questionable value for seniors:

• You don't have anything a creditor can take. Creditors aren't allowed to take the things needed to maintain a home, such as household goods, a modest car, Social Security funds, and many retirement accounts. Because these things make up all of what many seniors own, many are "judgment proof," and therefore, filing for bankruptcy isn't necessary. Even so, some judgment-proof individuals will file to stop creditor calls and eliminate the worry of losing money from a bank account. (Read more in What Is a Bank Account Levy?)
• You have too many assets to benefit from bankruptcy. When you own property and income that isn't protected from creditors, filing for bankruptcy might not be a good idea. Chances are you'd lose the property in Chapter 7. In Chapter 13, you'd have to make a high Chapter 13 repayment plan payment because you must pay for any property you're not entitled to protect (but you can keep it).

Find out what bankruptcy can and cannot do to improve your financial position.

Determining When Bankruptcy Makes Sense for a Senior

Even though bankruptcy isn't always necessary, or even beneficial, it can work for some seniors. Here are a few things to ask yourself:

• Do you have the type of debt that can be wiped out (discharged) in Chapter 7?
• Do you want to catch up on home or car arrearages through a Chapter 13 repayment plan?
• Can you exempt (protect) all or most of your property?
• If you have to give up (or pay for) some property, will you discharge enough debt to make filing worthwhile?
• Is your income low enough to pass the Chapter 7 means test or will you be required to make monthly payments in Chapter 13?

Additional issues seniors will want to consider include:

• Discharging medical debt and credit card bills. These are two of the easiest types of debt to discharge in bankruptcy. In fact, filing for Chapter 7 bankruptcy can wipe out qualifying debt in a few months. But remember, if you're judgment proof, the creditor likely won't be able to collect for these bills anyway.
• Protecting home equity can be problematic. Many seniors have significant equity in a home. The homestead exemption protects a certain amount of equity, but the amount varies depending on the laws of the state. In Chapter 7, the trustee will take nonexempt property (including home equity) to pay creditors. (Find out more in the Homestead Exemption in Bankruptcy.)
• Protecting retirement accounts. Under federal bankruptcy law, almost all tax-exempt retirement accounts, including 401(k)s, 403(b)s, profit-sharing, and defined-benefit plans, are exempt in bankruptcy. IRAs and Roth IRAs are also protected up to a particular amount. You'll want to check with a bankruptcy attorney to be sure that your retirement qualifies for protection. (To learn more, including the current IRA limits, see Your Retirement Plan in Bankruptcy.)
• Protecting Social Security benefits. Your creditors can't take your Social Security benefits outside of bankruptcy, and they're exempt (you can keep them) in bankruptcy, but only if the funds remain in a separate account. Once commingled with other funds, they lose protection. Also, your Social Security benefits aren't counted as income for qualification purposes when taking the bankruptcy means test. But your Social Security income must be disclosed in your bankruptcy budget, and might still be used to disqualify you if your budget shows a significant amount of disposable income each month. To learn more, see Is Social Security Income Counted in the Chapter 7 Means Test?
• Retirement funds aren't protected once withdrawn. Receiving money from your retirement account can be tricky, too. In bankruptcy, your retirement withdrawals get treated as income for bankruptcy qualification purposes, and like cash for exemption purposes (most states don't provide much of an exemption for cash). Because these funds lose any protected status once withdrawn, a creditor can use a bank levy to get them. (Also, if you comingle withdrawn retirement funds with Social Security funds in the same account, the Social Security funds will lose the protected status. Again, the best practice is to keep Social Security funds in a separate account.)

Meeting With a Bankruptcy Lawyer

When dealing with assets, it's a good idea to set up a consultation with a knowledgeable bankruptcy attorney. For more information, see Should I File for Bankruptcy?